IRS: Reform Groups Call on IRS to Clarify 49 Percent Approach

CLC Staff
Apr 3, 2015
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In a letter sent today to the Internal Revenue Service, Democracy 21, the Campaign Legal Center and Public Citizen called on IRS Commissioner John Koskinen to clarify his remarks that Congress created a framework that allows 501(c)(4) groups to spend up to 49 percent of their expenditures on campaign activities.

According to a report in Tax Notes and Tax Analysis, Koskinen said on March 24, 2015:The framework Congress has is you get to pick where you want to be. If you spend at this point less than 49 percent of your money on politics, you can be a (c)(4).

The report stated that Koskinen “described 501(c)(4)s as being able to “spend a significant amount on politics,” and repeated, “This is the framework Congress has set up.”

According to the letter to Koskinen from the reform groups:

Contrary to your statements, however, this is not the framework Congress set up. Congress did not authorize section 501(c)(4) groups to spend 49 percent of their money, or even “significant” amounts, on political activities.

In fact, Congress did just the opposite in the statute it enacted. Congress provided that a social welfare organization must be operated “exclusively” for the promotion of social welfare.  As the IRS has long recognized, the “promotion of social welfare” does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.”  Treas. Reg. § 1.501(c)(4)-1(a)(2)(ii).

The letter continued:        

The courts have interpreted the section 501(c)(4) standard that requires an organization to be “operated exclusively” for social welfare purposes the same way they have interpreted a parallel provision of section 501(c)(3) that requires an organization that is tax exempt under that provision to be “organized and operated exclusively” for charitable, education or similar purposes. 

Thus, any substantial non-exempt purpose is sufficient to disqualify an organization from exempt status under section 501(c)(4).  Many court decisions reflect this view. 

According to the letter:

However, the IRS, by regulation, replaced the statutory command that section 501(c)(4) organizations exclusively pursue social welfare goals with the very different requirement that they do so only primarily.  Treas. Reg. §1.501(c)(4)-1(a)(2)(i).  This regulation cannot be squared with the plain language of the governing statute. Nor can it be squared with court decisions interpreting the statute to allow, at most, insubstantial non-social welfare activity.  Far from reflecting the “framework” that Congress has established, the IRS regulation is in derogation of Congress’ mandate.

In the decades since the adoption of this regulation, the IRS has compounded the problem by failing to define “primarily.” Aggressive practitioners have argued that anything up to 49 percent would be permissible under the regulation, and this view has not been challenged by the IRS as it should have been.

Thus, your position that a social welfare organization can spend up to 49 percent of its expenditures on campaign activity and still be “exclusively” engaged in social welfare activity is contrary to the statute and to a long line of court decisions construing the relevant provisions of the Internal Revenue Code.

The letter stated:

Since 2010, the “49 percent” approach has resulted in the growing improper use of section 501(c)(4) organizations to hide the identity of donors whose money is used for campaign activities to influence federal elections.  In fact, section 501(c)(4) organizations have been the vehicle of choice for those who want to channel dark money into federal elections.

Unless the “49 percent” approach is eliminated, and IRS regulation and practice is conformed to the IRC statutory standard forbidding any spending for non-exempt purposes above a de minimis or insubstantial amount, section 501(c)(4) organizations will continue to spend hundreds of millions of dollars in secret contributions on campaign activities in contravention of the IRC.

The letter concluded:

Absent such a decision by the IRS, any other changes in IRS regulations governing section 501(c)(4) organizations will be ineffective in preventing such organizations from abusing the tax laws to improperly launder secret money into our elections.

In light of your recent comments, furthermore, we call on you to clarify that Congress did not create the “49 percent” approach and that there is no basis in law for that approach given the statutory provisions of the IRC and court decisions interpreting the provisions.

To read the full letter, click here.

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